Brics bank: requiem for a dream

Incensed by their failure to reform, Brics policymakers have established a flawed rival to the World Bank and IMF. Rhetoric aside, the west dismisses emerging-market dissent over the broken financial architecture at its peril.

Brics leaders announce the establishment of their
new development bank in July

It was never meant to be this way. Chastened in the
post-Lehman climate and by misadventures in the Middle East,
Barack Obama’s presidency was hailed as an
historic opportunity to moderate US unilateralism and boost
global governance, from foreign policy to economic. As the
shift in the centre of financial gravity in favour of emerging
markets took root, hopes in 2008 snowballed that the governance
of the international financial system – from
capital-market regulation to the monetary system –
would reflect the newfound clout of developing markets.

Meanwhile, the IMF’s flexibility in lending
policies and shift from unbridled free market dogma, combined
with the G20’s dethroning of the G7 as the
principal forum for global economic co-operation, all boosted
the spirit of multilateralism.

Fast-forward to late 2014: international trade negotiations
remain on a knife edge,
Russia is reeling from the ill effects of western
sanctions, and the Brics are making concerted attempts to
diversify away from the dollar and the Bretton
Woods’ institutions. Meanwhile, efforts to reform
the IMF, from quotas to its leadership process, have collapsed,
with the blame falling squarely upon a fiscally conservative US
House of Representatives, ideologically unwedded to
multilateralism.

Six years after the collapse of the global economy that
triggered unprecedented co-ordination between world leaders,
fears of competitive exchange-rate devaluations, via FX
interventions or over-zealous monetary easing, and trade
skirmishes, continue to cast a shadow over the
demand-deficit-ridden global economy.

And yet multilateral institutions are unable to breathe life
into monetary coordination at an inflection point for the
global economy, despite a cyclical rebound in growth. Europe
continues to export deflation. Hopes of a spirited US recovery
to power exporting nations remain dashed. Current account
surplus nations, such as Germany, China and Japan, are either
unwilling or unable to boost aggregate demand. And emerging
markets remain hostage to Fed-induced capital cycles.

Joseph Joyce, professor of international economics at
Wellesley College, and a keen observer of globalization, says:
"The Bric nations are seeing a breakdown of US domestic policy.
They want to develop their own institutions so they have their
options and shape events. At present, they are not calling for
the IMF to be shunned. They are being cautious, and not burning
the bridges."

International institutions remain hopelessly
unrepresentative. The Bric nations account for 20% of global
output but represent just 10.3% of the IMF quota while Europe
is allocated 27.5% with an 18% share of global GDP. The US
maintains its power of veto.

Muscular posture

For proponents that fear economic coordination is
fragmenting as emerging economies assert a muscular posture on
the international stage, the establishment of the New
Development Bank (NDA) in July, by
Brazil, Russia, India, China, South Africa (Brics) is the
watershed for a new order. Joyce adds: "The principal forum for
global economic discussions, IMF and G20, are proving
ineffective and losing relevance. If a lot of emerging markets
move to different arrangements, it carries with it the risk of
a crisis if global co-ordination breaks down."

The NDA’s mission statement mimics the existing
Bretton Woods’ institutions, the World Bank and
IMF, which were set up after the Second World War, boasting
strong US leadership, to stabilize the global monetary system.
At present, the NDA’s arsenal is modest but a
precedent has been established. The five countries aim to
provide loans for capital programmes, principally
infrastructure, with a current maximum allowable capital of
$100 billion, while boosting monetary stability, through the
establishment of a $100 billion central bank swap loan, the
Contingent Reserve Arrangement (CRA).

The problem is the rest of the world must
find dollars to buy energy, conduct trade settlement
and service dollar debts

Charles Gave

The bank is to be based in Shanghai, and the Brics will
contribute to the CRA according to their respective size,
underscoring China’s clout. The presidency will
rotate, starting with India, while Beijing will not assume
formal leadership until 2021. Other developing countries, from
low- to middle-income, will also be able to contribute capital
and apply for funding but their voting shares will be capped so
as not to dilute the founders.

Russian president Vladimir Putin, with characteristic
fanfare, articulated the NDA’s grand ambition in
July. "The international monetary system … depends a lot
on the US dollar, or, to be precise, on the monetary and
financial policy of the US authorities. The Brics countries
want to change this." Thanks to
Russia’s misadventures in Ukraine, and
subsequent western sanctions, Putin has helped to de-dollarize
the country’s economy – but for all the
wrong reasons.

Rogério Studart, the World Bank’s
executive director for Brazil and eight other Latin American
countries, who was involved in discussions in the
NDA’s establishment, says it will serve as a
conduit for capital financing for cross-border infrastructure.
As a result, the NDA will "complement existing multilateral
institutions, boost the efficiency of domestic savings and
develop capital markets", including the potential issuance of
30-year bonds in local currencies after a credit rating is
established in two years, he says.

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